What should South Korea’s new trade policy be?

Author: Troy Stangarone, KEI

In South Korea’s recent presidential campaign, the candidates put forward a variety of positions on issues of the day, with one exception. Trade — the lifeblood of South Korea’s economy — was conspicuously absent from the discussion.

A woman walks in Myeongdong shopping district in Seoul, South Korea, 31 March 2016. (Photo: Reuters/Kim Hong-Ji).

Now that Moon Jae-in has secured the presidency, he should build South Korea’s trade policy around the need for strong rules that protect international trade and investment. This includes increasing South Korean competitiveness and minimising the ability of countries to retaliate against South Korea for political reasons as China has done over the contentious Terminal High Altitude Area Defence (THAAD) system. To achieve these goals, the Moon administration should join a revived version of the Trans-Pacific Partnership (TPP) and push for more ambition in the Regional Comprehensive Economic Partnership (RCEP).

Trade matters immensely to South Korea’s economic growth — according to the OECD, trade accounts for 85 per cent of South Korea’s GDP. But while exports have grown in recent months, they are down 13.5 per cent since 2014 and total trade is down 18 per cent over the same period.

Some of the decline in South Korean trade can be attributed to a corresponding decline in commodity prices. But South Korea is also increasingly facing greater international competition and uncertainty in its trading relationships. In a number of key areas, including automobiles, home appliances, shipbuilding, steel and semiconductors, China is more competitive than South Korea on price, negating South Korea’s diminishing advantage in quality and technology.

For much of the Park Guen-hye administration, the focus was on RCEP and concluding a free trade agreement (FTA) with China. That FTA with China gave South Korea increased market access to its largest trading partner, and uniquely placed South Korea as the only significant global economy that has FTAs with the United States, China and the European Union. The advantage of RCEP over the TPP was its potential to increase trade within the region by upgrading South Korea’s FTAs with ASEAN and India. Seoul already had fairly high standard agreements with most other TPP countries, which made the agreement less attractive.

Recent events, however, have demonstrated that focusing primarily on the economic benefits of tariff cuts at the expense of trade rules can have economic costs. While China has not formally stated that it is sanctioning South Korea over its decision to deploy the THAAD missile defence system, it is clear that China is trying to pressure South Korea into reversing its decision through economic means.

The clearest example is the Lotte Department store chain — after the company agreed to a land swap with the South Korean government for the deployment of THAAD, Lotte has seen the temporary closure of 80 per cent of its stores in China for supposed fire and safety reasons. Lotte estimates the monthly loss from these store closures at US$66 million. If Lotte sticks it out in China, those losses could extend to more than US$660 million for 2017.

Lotte hasn’t been the only target for Chinese retaliation. In March, China informally forbade group tours from going to South Korea, resulting in a 40 per cent drop in Chinese tourists in just a few weeks. China has also taken steps against highly popular Korean dramas and other creative content — losses in these and other areas could reach US$7.5 billion this year.

The THAAD experience should be instructive for the new Moon administration. Some will argue that this demonstrates why South Korea must tread carefully with China on security matters. That would be the wrong lesson to take. Instead, it should demonstrate to Seoul the need to ensure strong trade rules.

While China is not a party to the TPP and the agreement would not address every issue that South Korea has faced with China, it is an important step in strengthening international trade and investment rules — rules that China may one day adopt. As South Korea increasingly moves into creative industries such as entertainment — where the Korean Wave has made South Korea the world’s fifth largest exporter of audio-visual services — the rules of trade, the protection of intellectual property and behind-the-border issues will affect South Korean trade more than tariffs.

If rules similar to the TPP had been in effect with China during the THAAD dispute, China would have been obligated not to discriminate against Korean digital content and Chinese consumers interested in Korean content would benefit from the agreement’s provisions on cross-border dataflow provisions. Of course, the TPP is not perfect. In any future regional negotiations, China will no doubt seek to maintain as much autonomy as possible — but recent events demonstrate how that autonomy can be abused.

By joining other Asian nations’ efforts to revive the TPP without the United States and push for higher standards within RCEP, Seoul can create much-needed competition to improve the efficiency of South Korean firms. At the same time, pushing to join a high standard agreement such as the TPP would begin to create standards in international trade that would help protect Korean firms and send a signal about the type of trading system South Korea envisions — one where fair play matters.

Troy Stangarone is the Senior Director for Congressional Affairs at the Korea Economic Institute of America. The views expressed here are the author’s alone.

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